Biggest debt write-off in history paves the way for Greek bailout

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Greece has cleared a major hurdle in its race to avoid bankruptcy by persuading most of its private creditors to sign up to the biggest national debt write-down in history, paving the way for a second massive bailout.

Following weeks of intense discussions, the Greek government said 83.5 per cent of private investors holding its government bonds were participating in a bond swap. Of the investors holding the E177bn (£148bn) in bonds governed by Greek law, 85.8 per cent joined.

“We have achieved an exceptional success... and I believe everyone will soon realise that this is the only way to keep the country on its feet and give it a second historic chance that it needs,” finance minister Evangelos Venizelos told the Greek parliament.

He said he would recommend the activation of legislation known as “collective action clauses” to force bondholders who refused to sign up into the swap. The issue was to be discussed at a Cabinet meeting yesterday.

“A window of opportunity is opening” with the success of the deal to reduce the country’s E368bn (£307bn) debt by E105bn (£87.7bn), or about 50 percentage points of gross domestic product, he said.

The bond swap is a radical attempt to pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing debt, the country can gradually return to growth and eventually repay the remaining money it owes.

The investors will exchange their bonds with new ones worth 53.5 per cent less in face value and easier repayment terms for Greece. A total of E206bn (£172bn) of Greece’s debt is in private hands.

The swap will effectively shift the bulk of the remaining debt into public hands – mainly eurozone countries contributing to Greece’s bailouts.

If the exchange had failed, Greece would have risked defaulting on its debts in two weeks.

A successful bond swap is also a key condition for Greece to receive a E130bn (£108bn) package of rescue loans from other eurozone countries and the International Monetary Fund.

Eurozone finance ministers said yesterday that Greece had fulfilled the conditions to get approval for the bailout soon.

“There is no doubt that we will be able to decide on the release of the second Greece package next week,” German finance minister Wolfgang Schaeuble said. The IMF has set a tentative date of March 15 to discuss the size of its participation.

The ministers also released up to E35.5bn (£29.7bn) in bailout money to fund the debt swap. Investors exchanging bonds will receive up to E30bn – or 15 per cent of the remaining money they are owed – as a sweetener for the deal and E5.5bn (£4.6bn) for outstanding interest payments.

Markets, which had rallied on Thursday on expectations of a successful deal, were muted yesterday. The Stoxx 50 of leading European shares was up 0.1 per cent, but the main stock index in Athens was down 0.32 per cent in midday trading. The euro retreated 0.4 per cent from recent highs against the dollar to 1.3215.

EU economic affairs commissioner Olli Rehn said: “I now expect the Greek authorities to maintain their strong commitment to the economic adjustment programme and to rigorously and timely implement the policy package.”

IMF head Christine Lagarde also welcomed the debt writedown agreement. “This is an important step that will dramatically reduce Greece’s medium-term financing needs and contribute to debt sustainability,” she said.

The Fitch ratings agency downgraded Greece to “restricted default” after the bond swap deal. The move was expected, with ratings agencies having said they considered the bond swap deal to be a default.